Exbiblio’s Finances

September 25th, 2006 by Hugh

On my visit to Exbiblio last week, I intended to ask some straight questions about the bottom line. Most of my questions were answered when the whole team was called together for what was billed as the first in a regular series of updates on Exbiblio’s progress. We met in the newly opened “wing” of the already quite extensive office. Martin King was in the chair, and his relaxed demeanour and quiet voice belied the starkness of the situation which he outlined.

Here’s my summary of what he said: Exbiblio has been spending money faster than originally planned. The money can be stretched out, just about, until next March when the product launch is due – the product being the oPen scanner. There will then be a pressing need to find outsider investors. If enough sales can be generated to show that there is demand for the oPen, then the founders or Exbiblio’s bankers might extend a loan for six months to allow it to raise capital. However you look at the situation, it’s going to be a close call.

Exbiblio started off last spring with $2 million in the bank provided by the founders. Martin says that the plan was to get through the “demonstration of critical utility” with those funds. Last week Exbiblio finished spending the $2 million, and it still hasn’t proved that it has a viable product. The first prototype of the oPen is expected early next week. It’s expected to take four to six weeks to prove whether or not the device can secure a place in people’s lives. The hope is that once people try it, they will wonder how they ever got along with out it. During this period there will be some honest appraisal by the team of the prototype and its usefulness.

The founders have put another $725,000 into the Exbiblio account, which is essentially two months of operating funds. Exbiblio is spending $200,000 a month just to pay core expenses – the salary, the lease on the office, the equipment, and so forth. In addition, it is spending almost the same amount again on the hardware development, which calls on outside consultants who, in the words of Martin, are “very good but very expensive.”

The company will have to meet another significant expense which it hadn’t fully anticipated. 20 out of its 31 patent applications will reach their 30th month anniversary at the end of September. At that point, Exbiblio will have to make a decision about which countries it wants to file those patents in outside the US. The cost of filing the patents internationally is of the order of $15,000 to $30,0000 per patent per country. The company wants to file most of them in Europe and Asia and therefore is looking at a bill that’s getting on for half a million dollars.

Martin says, “We have historically had an understanding that if we can demonstrate that we have a truly useful technology, and that we can build working hardware, and can create a fine user experience, then the personal funders to date would provide an additional $2 million of capital in addition to the $2 million that came in the spring. That did not anticipate the $750,000 that we have brought in for the next two months of operations before we were able to get the critical utility conclusion, and it didn’t fully anticipate the $500,000 in intellectual property. The position is a little unclear in the short term. If we were to take those sums out of the $2 million, that doesn’t leave much.”

Exbiblio is a little wary of venture capitalists, most of whom are focused on a quick sale of an investment. A fast buck does not fit with Exbiblio’s culture: “We are entirely focused on building something that’s here to last, and is a meaningful thing for us to spend our time doing. That adds some challenges to our ability to find funding. We may well find more and more venture capital funds who want to work with our company and our culture and do the kind of things that we want to do in the world. We are also looking at finding private investment from individuals who share our values, corporate money from potential partners, and building the company on revenues from the sales of our products. And then there’s the Holy Grail of technology start-ups which is debt financing. If you can demonstrate that you have orders or potential orders in sufficient quantities, then you can actually borrow money from the bank without giving up any ownership.”

Exbiblio’s current plan is to press on through to the product launch in March, and to demonstrate that it can find a market by the end of the month. Previous to the launch, there will be a beta test in January / February with 1000 participants. The company doesn’t have to become profitable at this stage, but it has to show that demand for the oPen exists. If it can get orders, it can get funding one way or another. It could probably find a life-line in the form of a loan for about six months until suitable investors could be found. But it all depends on early orders coming in. If it doesn’t get sufficient orders, that’s the end, however great the product is. Martin compares starting up an innovative company to taking a bungee jump. There’s nervous laughter in the room at this analogy – but I don’t detect any despondency. There’s no sense that this is a train heading for the buffers. I don’t hear people talking about the financial situation afterwards. Everyone goes back to work on their own projects. All I can say is that, with such a tight time-frame, Exbiblio better have a fabulous marketing campaign ready for the Spring.

5 Responses to “Exbiblio’s Finances”

  1. Francisco Soto Says:

    Hugh, my advanced excuses if I look like an alarmist fool, but I want to call the attention to the unwanted possibility of some readers misinterpreting some phrases like: “Exbiblio’s current plan is to press on through to the product launch in March, and to demonstrate that it can find a market by the end of the month”, “But it all depends on early orders coming in. If it doesn’t get sufficient orders, that’s the end”, “It’s expected to take four to six weeks to prove whether or not the device can secure a place in people’s lives”, and “There’s no sense that this is a train heading for the buffers. I don’t hear people talking about the financial situation afterwards”.

    To potential investors, future partners or clients, I think they paint a wrong picture of solutions nervously looking for a problem to fit in, of providence as a market force, of investors staring at the exits, of an organization comfortably numb.

    If you add the “not fully anticipated” expiration timeline for the international patents and its upcoming cost, the burn rate math, the emergency backing by the founders, it all can be misread as if they have just found there are only 6 months of financing. I don’t think it represents an accurate picture of the management team.

    Finally, also from the post, and according to the understanding among founders of the venture, they won’t advance more money until the end of March, when the product demonstrates its potential. Then, why should not private investors wait until then before committing? I suppose that because entering latter means entering at a higher price because of the lower uncertainty. But since insiders have already made known that they are not willing to finance more than the short term out of necessity (plus another possible 750 as a loan), and they are the ones who have the best information available (from the inside), what signals this to potential backers? In my opinion, that is better to wait to see. If the product succeeds in those 4-6 weeks, the lower uncertainty may be balanced with pressing financial needs. If it does not, all this information may give potential last-minute investors a misplaced confidence in negotiations.

    As an outsider, the blog is all the reference I have about ExBB, so there is a chance that other readers also misconstrue the whole post and read too much where no alarm is to be found. If some people could reply and clarify some of the points I think it would add to the debate in a productive manner.

    Please, if you consider this comment should not be posted feel free to disregard it or edit it as you see fit.

    Best regards,

    Francisco Soto

  2. Hugh Says:

    Hi Fancisco, I was quoting Martin King from a recorded transcript of the meeting, and then I ran the post past him (I don’t normally do that) to check that he felt it was a true and accurate reflection of the situation. I added in a few tiny phrases at his request – really minor details – but he didn’t ask me to tone down the tightness of the time-scale or the finances. In fact, he seemed happy with the way I had written up.

    In Martin’s own words, it’s a “bungee jump”. He added that we can only hope that the bouncy cord is shorter than distance to the ground.

    Later, in an interview, I really pressed Martin and Ed about the situation. I will be writing up their replies later in the week.

  3. Ed Says:

    I have a few thoughts/comments on this thread that I can share. We are pursuing three substantial milestones. Critical utility, initial commercial usage, and then a phase-two version of the product and a more substantial commercial role-out. We have the financial resources today to reach the first milestone, with a window to get there in the next 30-45 days. We have a commitment, based on performance, to reach the second milestone, with an additional $2M investment and an execution window until March-2007. To reach the 3rd milestone we will need external funding. To get that funding on the best possible terms and from preferable sources, we want to be in a position with commercial product and paying customers. We understand that this strategy and our current delays introduce the strong potential for a gap in our financial resources, specifically in Q2/Q3 of 2007, so we’re starting to plan now for that gap by lining up bridge funding. While I agree with Hugh that this plan has plenty of risks, particularly given the tight timeline and the fact that we’re already a bit behind plan, but I also think he missed the mark a bit in his initial post by suggesting that we’ll need to have great sales #s in March to be successful. Our focus for March is not sales numbers, but usage numbers. I’m not going to suggest that this is an easy goal, but it reinforces our need to really nail the critical utility up-front so that we build a product that people actually use.

  4. Francisco Soto Says:

    Thanks Ed and Hugh. I think this sets the record straight and paints a clear picture of the upcoming timeline.

  5. Hugh Says:

    Thanks Ed for clarification. I hope the picture will fill out when I write up the conversation about the marketing plans. As Ed says, this will show that the target for sales in March is fairly modest, but merely aims to show that potential demand exists.